Lifting the lid on the EU’s Sustainable Finance Action Plan

5 November 2020



Ryan Medlock, Senior Investment Development & Technical Manager investigates the Sustainable Finance Action Plan and explores the different implications for advisers.

The surge in momentum behind responsible investing continues to accelerate with record flows continuing to be pumped into Sustainable funds. In addition to this client demand and many prominent societal shifts taking place, the finishing touches are being made to a number of regulatory proposals that are likely to have a fundamental impact on the financial advice process. This is predominantly being driven at a European Union (EU) level and central to this is the European Commission’s (EC) Sustainable Finance Action Plan.

A little piece of context

In recent years, the EU has publicly backed its commitment to international accords such as the Paris Agreement and the UN’s Sustainable Development Goals. Sustainable finance is one mechanism being used towards meeting the 2050 carbon-neutrality goal and this is where the Sustainable Finance Action Plan comes into play.

There are a number of recommendations within this plan such as the creation of an EU taxonomy, the Sustainable-Finance Disclosure Regulations (SFDR) and development of Sustainability Benchmarks.  

But that’s not all because in addition to these proposals, the EC made a formal request to the European Securities and Markets Authority (ESMA) to integrate sustainability risk into a number of delegated acts including MiFID II. This is undoubtedly the big one for the financial planning community because it injects ESG considerations into the heart of the advice process.

Although this package of proposals are been driven at an EU level, it is likely that these measures will be transcribed into UK Law over similar timescales. Let’s explore the main legislative proposals within this package:

  1. EU Taxonomy: a framework to label green activities
  2. Disclosure: a common way to inform investors of sustainable risk & investment types
  3. Benchmarks: two new categories plus additional disclosure requirements
  4. MiFID II: integrating sustainability risk and amendments to Article 25

EU Taxonomy

The number one recommendation in the action plan is the creation of an EU taxonomy which is a classification system to help investors determine which financial products are ‘sustainable’.

To meet taxonomy eligible criteria, investments must meet one of six environmental objectives including climate change mitigation and pollution prevention. In addition, investments must also fulfil certain obligations such as substantially contributing to one of the environmental objectives and also comply with minimum social safeguards.

The taxonomy is due to be fully put into application by 2022 and advisers will be able to identify how much a particular investment product invests in taxonomy-eligible activities, for example. The taxonomy will also be aligned with the goals of both the Paris Agreement and the UN SDG framework.

Sustainable-Finance Disclosure Regulations (SFDR)

The SFDR is the EU’s primary mechanism for promoting the integration of sustainability risks (the risk of investment fluctuation due to ESG factors) into the investment process as well as disclosing these risks and sustainability targets to investors. The regulations take a different direction from other recent pieces of EU legislation in moving towards a more mandated and prescribed feel by setting strict disclosure standards to combat the threat of greenwashing.

The regulations cover pre-contractual disclosures, disclosures in reports as well as website disclosures and marketing communications. The regulations also distinguish between two types of investment products:

  • Article 8 investments: products promoting environmental or social characteristics, and
  • Article 9 investments: products which have a sustainable investment objective.

There are a number of implications for advisers. This includes publishing information, such as a policy statement, on adviser websites highlighting how sustainability risk is integrated into the advice process as well as detailing this information in pre-contractual disclosures.

In addition, if an adviser promotes the ESG characteristics of either an Article 8 or Article 9 investment, the disclosures must include reference to how these characteristics are achieved. In reality, advisers should be able to satisfy the various requirements by passing-through the relevant disclosures from product manufacturers. However, firms will need to ensure they have a robust process in place to satisfy these regulations.

Ultimately, the SFDR should reduce the scope for greenwashing as disclosures will only contain relevant and targeted information as well as achieving greater consistency in disclosures between product manufacturers.

The SFDR is currently due to apply from 10 March 2021 but there is pressure from within the industry to delay the implementation of these requirements.


This proposal is in relation to the EU Benchmarks Regulation. Advisers should be aware that the amendments introduce two new categories of investment benchmarks, each with different requirements:

  • EU Climate Transition Benchmark (EU CTB)
  • EU Paris Aligned Benchmark (EU PAB)

In addition, the new regulations outline certain disclosure requirements for all benchmarks (excluding interest rate and currency indices) including a disclosure on their alignment with the Paris Agreement goals by the end of 2021.

In terms of the implications for advisers, this amendment is likely to result in greater transparency, a further reduction to the threat of greenwashing and increased comparability between benchmark providers.


ESMA has proposed a number of amendments for integrating sustainability risk into three key regulatory directives: MiFID II, AIFMD and UCITS. The amendments to AIFMD and UCITS largely focus around improving transparency and disclosure requirements of both asset managers and asset owners but it’s the MiFID II amendments which carry the most significance for advisers.

ESMA is proposing that advice firms take into account sustainability considerations when complying with their existing organisational requirements (conflicts of interest policies, risk management functions, systems and controls etc) as well as considering sustainability factors in the context of product classification. This represents a nod to the PROD rules and the requirement for identifying target markets.

But perhaps the most significant proposal for advisers is the proposed amendment to Article 25 of MiFID II. This relates to the suitability assessment and firms will shortly be required to take into account their clients’ sustainability preferences within this assessment to determine whether an Article 8 investment or an Article 9 investment should be integrated into their investment strategy.

As referenced in the SFDR section above, Article 8 investments would capture solutions with different environmental and social ambitions that don’t qualify as Article 9 investments. An Article 9 investment must have a sustainable investment objective aligned to the EU taxonomy. This includes measurable environmental objectives in relation to renewable energy, greenhouse gas emissions or its impact on the biodiversity for example.

All of this is still in the negotiation stage and we are expecting the final rules and further clarity to be published in due course. The rules would then come into effect 12 months from publication so it’s reasonable to prepare for their implementation during Q4 2021.

The final word

I think it’s very clear that the EU’s Sustainable Finance Action Plan is a very ambitious project that is undoubtedly going to propel sustainability considerations towards the forefront of advice processes.

At a UK level, we have seen many developments over the last 12 months. The DWP introduced new rules in October 2019 aimed at trustees of occupational pension schemes largely in relation to updating Statements of Principles (SIP) to disclose how ESG is taken into account within the investment decision making process. There are further rules from the DWP coming into effect in October this year to include an implementation statement in the SIP.

In addition, there’s a proposed amendment to the Pension Schemes Bill which will make the UK the first country to align the actions of pension schemes with the Paris Agreement and there is also an FCA requirement for Independent Governance Committees to report on their firms’ ESG policies. Collectively, all of this is a very clear signal of intention from policymakers and regulators about the direction of challenge in this area.

Developments in this area have moved at quite some pace and will continue to do so in the months and years ahead. Advisers should consider the many different implications of these legislative proposals and give consideration to how all of this can be integrated into their firm and advice processes.

About the author

Ryan Medlock

Senior Investment Development Manager

Ryan’s journey with Royal London began back in 2008 after starting his career in compliance with Norwich Union. As an Investment Proposition Manager, Ryan contributed to the growth and development of Royal London’s Governed Range before moving to Aberdeen Standard Investments for a stint in the Strategic Client’s relationship team. Ryan returned to Royal London in 2018 with a focus on exploring adviser angles amongst complex regulation and investment themes. Ryan is responsible for engagement with the advice community and investment industry initiatives, presenting, writing articles and commenting for the press and holds the CFA Diploma in Investment Management (ESG). Ryan is particularly proud of the fact that he finished 952nd in the 2008/09 edition of Fantasy Premier League.

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